Given the recent PilieroMazza webinar on Data Rights in federal contracting, we have had a number of clients raise concerns or questions about the government’s “march-in” rights under the Bayh-Dole Act, which controls certain data rights and patent issues under federal contracts. For those of you who do not already know, for patentable items created under federally-funded contracts, the government has the right to force the contractor who holds the patent to issue a license to third parties, including competitors, under certain conditions.
As we will see, however, the government’s rights in this regard are limited and, to the best of our knowledge, it has never used the “march-in” rights to actually force a contractor to unwillingly license its product to any third party, much less a competitor. As such, while the government does have such a draconian power, it is highly unlikely that it will ever be used except in perhaps the most extreme examples. Thus, the proverbial ‘damoclean sword’ that is the government’s “march-in” rights, turns out to be nothing more than a child’s toy made out of construction paper.
When it comes to the government’s “march-in” rights, which, again, is the government’s right to force a private patent holder to license its product to third parties against its will, can only be used in certain limited circumstances. The Act states that the right should only be used if the government determines that action is necessary when one of the following situations applies:
- The contractor holding the patent has not taken, and is not expected to take within a reasonable amount of time, effective steps to achieve practical application of the patented item;
- To alleviate health or safety needs which could be remedied by the application of a subject patent but which are not satisfied by the contractor holding the patent;
- To meet the requirements for public use that are not being satisfied by the contractor holding the patent; or
- The contractor holding the subject patent improperly gives a third party a license to exclusively sell or use the patented item in the United States in violation of rules requiring the items to be substantially manufactured in the United States. While there are nuances to the rules, the above four situations describe the circumstances under which the government has the legal right to “march-in” and force the contractor holding the patent to issue an involuntary license. Given the broad and somewhat vague language in these situations, however, it would seem that the government has broad discretion to assert its “march-in” rights, and that is precisely what leads to concern and fear within the contractor community.
The most recent example to show how unlikely it is for the government to actually exercise its “march-in” rights is the case of Genzyme, Inc. and its drug for treating Fabry disease – Fabrazyme. In this situation, Genzyme held a covered patent for Fabrazyme, the only drug approved by the Food and Drug Administration (“FDA”) for the treatment of Fabry disease; a terrible illness whereby fat accumulates in organs and blood vessels causing renal disease, heart disease, dermatological problems, ocular disease, burning extremity pain, tinnitus, and increased risk of stroke.
Genzyme had an outbreak of a certain viral infection at its manufacturing plant and was, thus, required to suspend all manufacturing of the drug. Certain Fabry disease patients petitioned the FDA to exercise its “march-in” rights under the “health and safety needs” provision of the Bayh-Dole Act. The patients claimed that Genzyme’s inability to produce the lifesaving drug put at risk the health and safety of all Fabry patients and, as such, it was the duty of the FDA to “march-in” and force Genzyme to license its patent to other drug manufacturers so that Fabrazyme could continue to be made.
Unfortunately for the sufferers of the terrible Fabry disease, the FDA refused to exercise its rights based, in great degree, on the promise from Genzyme that it would begin producing the drug again in short order. In reality, three years passed before the shortage was alleviated, leaving many Fabry disease sufferers without remedy. What makes this example even more extreme is the fact that the European Medicines Agency required Genzyme to alleviate the shortage by providing enough of the drug to European patients. Genzyme complied and shifted drugs away from the United States market to help.
Despite the fact that this action further increased the medical emergency already impacting the nation, the government still refused to exercise its “march-in” rights to save American lives.
I would submit that what the Genzyme case shows is that short of some plague sweeping the globe in an order of magnitude similar to a zombie apocalypse, it is highly unlikely that the government would ever exercise its “march-in” rights against contractors holding covered patents.
This means that most federal contractors, especially the most common holders of covered patents, such as those holding patents in the information technology or other disciplines more common than pharmaceuticals or other lifesaving technologies—which one would assume would offer greater incentive to the government to exercise its “march-in” rights) —the chances that the government would walk in and force you to license your product to a competitor is quite remote. Hopefully, this puts contractors at ease knowing that your patents are safe, even if it is taking time to find or implement a commercially-viable product.
About the author: Cy Alba is a partner with PilieroMazza and is a member of the Government Contracts and Small Business Programs Groups. He may be reached at firstname.lastname@example.org.